Opinion

China's already in pain, and that's before the latest Trump tariffs

The impact of the trade war with the US is now being reflected in a steady deterioration of China’s economic data even before the most recent tariff imposts have had a chance to bite.

This week’s trade data shows that both its exports and imports are falling, with exports down one per cent and imports 5.6 per cent in August.

Exports, which had grown 3.3 per cent in July, were lower than anticipated, given that there was an expectation that US importers would "front-load" their purchases to get in ahead of the latest round of tariffs. Exports to the US dropped 16 per cent.

Manufacturing businesses around the world are waiting rather than investing.Credit:Bloomberg

The fall in imports probably points to weakening consumption within China, although it might also relate to a decline in the import of components that are part of the supply chain for its finished exports.

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The effects of the final two rounds of US tariffs – the 15 per cent tariff on $US112 billion ($163 billion) of consumer products that was imposed earlier this month and the final tranche that will impact $US160 billion ($233 billion) or so from December 15 – are yet to come.

China has redirected some of its exports away from the US towards the eurozone and Asia (some which may effectively be re-routed Chinese exports to the US through tariff-free economies) and opened up some of its markets to non-US imports.

China's exports and imports are sinking.Credit:Bloomberg

That might have slightly blunted the effects of the tariffs but they remain a negative influence on the economy and it will be of little consolation that the trade war is also rebounding on the US and undermining its growth, albeit to a lesser extent.

China’s June-quarter economic growth of 6.2 per cent was already the weakest for nearly three decades. With the damage to China’s economy and the general slowing of global growth caused by the trade war, the authorities could be expected to try to respond and they have.

So far, however, their actions have been cautious and very targeted when compared to the way China has reacted to threats to its economic growth in the past, which has tended to involve vast amounts of stimulus being thrown at the economy.

So far, apart from allowing the renminbi to weaken through the once-psychological ratio of 7:1 against the US dollar, the authorities have loosened the reserve requirements for Chinese banks to inject liquidity into the system, encouraged some limited infrastructure investment and made some selective tax cuts.

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Last week they injected 900 billion renminbi (about $184 billion) of liquidity into their banking system by reducing bank reserve requirements for the third time this year and the seventh in less than two years. Earlier they had changed their interest rate framework to modestly lower interest rates for business and households.

While there is an expectation there will be more and larger doses of stimulus if the economy continues to slow, China is acutely aware that crude boosts to spending in the past resulted in large amounts of wasteful investment and fuelled property bubbles and financial leverage.

In fact, before the trade war started, there was a major effort underway to purge unproductive activity and to deleverage the economy. Concern about not repeating past mistakes will discipline any further stimulatory measures.

The other lever the authorities could pull is to allow the renminbi to weaken further, although it has strengthened slightly since hitting its year-high of 7.2 to the US dollar a week ago.

The authorities would be mindful of what happened in 2015, when there was a significant depreciation of the currency and capital flight on such a scale that they were forced to use up about $US1 trillion of their foreign currency reserves to stem the flow.

Since then capital controls have been tightened. Indeed, late last month China introduced a new set of controls on capital outflows that would take effect if and when the State Administration of Foreign Exchange (SAFE) declared a financial situation in China "abnormal".

The controls limit real estate investment offshore, require more documentation for funds transfers and much stricter oversight of banks undertaking foreign exchange transactions. SAFE has the ability to block transfers of funds in an abnormal financial situation.

Whether the new layer of controls – earlier this year SAFE required banks to do more monitoring of their foreign exchange businesses and to manage balances in line with government policies – is a response to the recent depreciation of the renminbi or pre-emptive action against further depreciation isn’t yet apparent.

If China were to allow the currency to depreciate more it could reduce the effects of the tariffs on the competitiveness of its exports although, even with the new controls, the spectre of capital flight and an expectation that further devaluation would infuriate the US would make the authorities cautious about exercising that option.

China and the US will resume trade talks next month but, unless the Trump administration is prepared to back away from some of its key demands, the talks are likely to be as unproductive as previous attempts to negotiate a deal.

China has been prepared to make concessions but not those – some of which the "hawks" in the Trump administration regard as non-negotiable – that would impact on its sovereignty or thwart its economic ambitions.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.